I HOLD THIS TRUTH TO BE SELF-EVIDENT, THAT A DEBT CRISIS CANNOT BE RESOLVED WITH MORE DEBT

Thursday, January 7, 2010

Debt On ICE(land)

I have a bunch of friends, both inside and outside the finance business, who vehemently claim that countries cannot and do not go bankrupt. Their position obviously flies in the face of history (Ottoman Empire, Czarist Russia, Argentina... and a whole bunch of others), but they keep on insisting. Unfortunately, they have been in good company (well.. bad company) at least since the 1970's when Walter Wriston, then CEO of Citibank infamously proclaimed that "countries don't go bust". A decade later the Latin Debt Crisis nearly sunk a number of major US banks, Citi included (they were ultimately bailed out by the Brady Plan).

I think what my friends really mean is that in today's financial world countries could (and do) go bust in essence, but then get bailed out by the likes of the IMF, other central banks or creditors' groups.

However, it looks like things are about to change; that a shift of tectonic proportions is taking place in - of all places - tiny Iceland.

Iceland: Unlikely Hotbed of A Debt Revolution?

I am not going to repeat what went on there during the credit boom and its aftermath - you can read about it here. What is more important, however, just took place a couple of days ago: the country's people have forced a referendum on the issue of their government borrowing $5 billion to repay foreign depositors (mostly Brits and Dutch) of three failed Icelandic banks. Simply put, The People of Iceland are angry at having to foot the bill for private transactions gone sour. (If you prefer Latin, Vox Populi Deus Irae.)

Can you blame them? Or, to use a more visual approach to the matter, just look at the wonderful sculpture below.

35 comments:

I disagree with your analysis. These are simply not "private transactions gone sour". Raising money in foreign countries under an EU cross border agreement where government guarantees retail deposits in the face of corporate failure renders the transactions squarely "sovereign".

I do however understand why the island's population don't yet understand this niggly fact.

What the Icelanders are repudiating are the debts of the British and Dutch subsidiaries of the Icelandic banks which were under the regulatory and deposit guarantee authority of Britain and the Netherlands.

What the UK and Dutch are demanding is nothing less than extortion under threats of illegal retaliation just like France blackmailed New Zealand into releasing the spy who bombed the Rainbow Warrior and murdered the Greenpeace photographer by vandalizing NZ exports to France during customs inspections and refusing to pay for the damage.

To Hel's point; economist Michael Hudson has been advising the Icelandic govt on debt repudiation and substituting sovereign credit domestically for bank or bond debt.

In other international developments, now that the litigious lobby of the un-Loved Levantines is pushing for a major expansion of the endless WoT into yet another target on their to-deracinate list I thought I might share some U-Tube videos I found over the weekend about the potential next destination for our heroes in uniform; quite the scenic spot, they should enjoy their tours of duty there:

I just wrote somewhere in a French blog that if it was Thatcher instead of Brown, then we may see military action against the Vikings, similar to the French invasion of the Rhine valley in 1923 after Weimar Germany defaulted.

But I somehow doubt (and regret :) ) that we will see a comedy like this one these days....

I think Iceland is playing a little game of chicken with Britain et al. There is no harm in negotiating for a better deal, and they must suspect that the IMF/Powers that Be do not want to cut any country adrift at this time (which would raise serious concerns about the IMF's committment to backstop all of the bad debts in Eastern Europe/Greece/Spain etc.)

But this is what happens when bad things don't happen to defaulters--they start to realize that they don't have to pay. At some point the backstoppers will end the blank checks--not out of the kindness of their hearts, but because by implicitly guaranteeing debts they are getting screwed. Now, the backstopper may not mind getting screwed because they aren't playing with their own money (I'm talking about you, Ben) but at some point it will matter and the game will end.

Lots of great stuff to think about and analyze in this situation.First off, mucho thanks to Yoyo for his clips. The para glider clip with the beautiful music brought tears to my eyes, it was just THAT beautiful.I will confess my numerous identifications with the Icelandic people. Some points to remember : all modern day democraties pay lip service to the idea that their legitimacy resides in representing the people.You know that you are in big trouble when you are no longer representing the people, and when the financial sector is engaging in transactions that are so complicated that only those highly specialized accountants and financial wizzes understand them (and not the people...). (Y'all know my feelings toward accountants these days...)One other "little" information to ponder.The Western World has had minimal military conflict within its own borders since the end of the second world war. This is somewhat due to the buildup of the international institutions designed to defuse military conflict.But... this remarkable decline in military conflict has been accompanied by increasing agression/agressivity in the financial/economic sphere.I submit that our natural agression has been channeled into burgeoning economic competition, while military activity has been exported to civilizations perceived as being outside of our references (big preference for Islam, which historically has been perceived as an enemy for a long long time now).Should Iceland default, what will the effect be on THIS aspect of our scenario ?Will military force be used against it ?Why, or why not ?Your turn, y'all.

Thanks for that great link, nmtdoc.It kind of got me thinking about the origin of that timeless expression "the buck stops here".Timeless expression, obviously.As far as missing out on the E.U. MY comment on that is... WHAT E.U. ? There is an EMU, but not an EU.No big loss for Iceland. They would be crazy to regret an exclusion from the EMU these day when there is no longer any such thing as state sovereignty, OR state monetary sovereignty in the EU at this time.

Why should citizens be held responsible for the failure of private enterprise? Same as if you are being held responsible for your neighbor's debts in case he defaults. I sincerely hope they don't cave in. Greedy investors chasing high returns in IceSave accounts. With high returns comes high risk, ask Madoff. LOL

Um Yoski, because the Icelanders asked for it to work that way when they thought it was in their advantage.

From what I have read, Andrew is Clavell is absolutely correct and this "niggly fact" is one Icelanders (an partisans) want to ignore.

And Hell, I do get your drift and agree they absolutely can give UK and Dutch savers the finger.

But there are always consequences as we both know. ;-)

If Icelanders do default, will you be as likely to lend Icelanders money when they next need it?

If you do not look at historical behavior as a predictor of future behavior, would you share with your readers whatever new model you have developed that predicts future human behavior and does not incorporate prior repayment history as part of its assumptions?

Indeed, we would be VERY interested in such a model in my line of work as well as it MIGHT have the potential to save a lot of human life and suffering.

The blame game is no good.Just how far back do you want to go historically to assign responsibility ?My impression on this site (but it's obviously not the only one, and it's better than at least 80% - ha, a number picked out of a hat - ...) is that most individual memory (as opposed to collective memory, obviously) is really really... short.

Okie, this world the lawyers want where everyone is a victim except for that one great and noble leader, at least (s)he is great and noble as who long as (s)he makes good decisions, seems to be moving us in this direction.

Gee, Thai, thanks for that really interesting link to the ants.I am fascinated by ants.Somehow, something tells me that asexual reproduction is not the way to go, and I think that you can relax about the idea of man going that rout.And if HE does, you can be pretty sure at this point that it's not the "males" that will get redundant for our species, it's the females.My little finger tells me this... ;-)

Those British and Dutch that invested in Iceland were greedy. They didn't like the interest rates they were getting in their home countries and looked for a bigger payoff else where. That is a risk they took, and now that risk blew up in their faces and are now crying to their mummy governments to get back their money.

The real problem here is that Britain and Holland, screwed up their own economies and these governments do not want to take ownership of their own incompetence. And now Britain and Holland are going to use extortion and blackmail to get their ways. Looks like nothing has changed in Europe, bullying is still rife.

Iceland and Icelanders, stand firm! Don't pay. If any of your political leaders look at paying back this money, get rid of them!

You are not to blame for these greedy individuals loses.

HANDS OFF ICELAND BRITAIN AND HOLLAND! TAKE OWNERSHIP OF YOUR OWN MESS! STOP MAKING OTHER COUNTRIES PAY FOR YOUR OWN GREED!

Bottom line to me is Iceland will only be in trouble if they listen to the IMF. They must insist that their debt(whatever they can settle on) be paid in Krona only. As long as they deal with their own currency they cannot default.

If Icelanders do default, will you be as likely to lend Icelanders money when they next need it?

Serial defaults did not stop anyone from lending lavishly to Argentina, Mexico, Turkey and so on and so forth - so why is this a problem NOW??

Unless, the real issue is that the banksters want to make it the law that their interests must be above and before everything else.

So, they start with something small to get a precedent set down before moving on to screwing the rest of the EU.

But, even if they succeed, it will only work for a while.

The peons will, even faster than now, realize that "Democracy" have not exactly been doing anything for them lately and they response will be the election of hard-line nationalists to get rid of the foreign parasites.

Fajensen, you are a WISE MAN. Seriously.For info, I thought that y'all would like to know that Sarkozy has appointed a cabinet minister of immigration and national identity, just before the regional elections in March that HE would like his party to win. He is planning on beating a drum that the far right has monopolized for a while, until the far right kind of disintegrated a couple of years ago in France. Get that ?NATIONAL identity. Perso, I am not in favor of national identity.I don't think that nationalism has been a wonderful cause to FEDERATE US, give us a viable group identity, and get us to cooperate.Time for something new, now.Unless it's.. a return to something OLD ?

For info, I thought that y'all would like to know that Sarkozy has appointed a cabinet minister of immigration and national identity, just before the regional elections in March that HE would like his party to win".

I guess that is why you guys tend to think in terms of "fatherland" where we do not- I'll let Deb grill you all on the curse of linguistic determinism since we have gone down that road and it seems old terriroy by now.

But how anyone could confuse the issue of bankers- which is really an issue of children should not play with toys- with nationalism is beyond me?

Deb, it seems to me you have another example to harp on of how of "every advantage has its disadvantage".

@fajensen

Agreed (with you and Deb).

.. Only I tend prefer to poke fun at futures of hard line nationalism with references to ant asexuality. ;-)

Thai... some people may be talking about "fatherland", but for a long time now almost everybody in the IndoEuropean mindframe has the idea of... MOTHER earth.I don't see that the Americans have any advantage over the Europeans on this issue.After all, y'all are the ones painting your lawns red, white and blue... and flag waving, etc etc.Is that patriotism or nationalism ?Just to throw out an extreme generalization, my little finger tells me that a patiot is devoted to his country, as a PLACE where he lives, and a nationalist is devoted to an... ABSTRACTION, a collection of perceived qualities, interests.One identity is very concrete, whereas the other is extremely abstract.I am, however, extremely open to critical opinions on this one, as I could be totally off the wall.

You have to laugh at how people like witter pointlessly about the 'plucky' Icelanders standing firm against the dastardly British and Dutch (quite why their taxpayers are less deserving of sympathy than the Icelanders seems to escape most commentators). Meanwhile, the real crooks have had it away on their toes with all the loot and no one seems to be prepared to lift a finger to prosecute them or to relieve them of their ill gotten gains. Crazy times in a crazy world.

AnonThe British & Dutch banking authorities allowed the Icelandic banks to establish subsidiaries in their countries and didn't bother to regulate them when they were clearly under their jurisdiction and beyond that of Iceland. The obligation belongs with the Dutch & British banking authorities and that is who their respective taxpayers should hold accountable.

As for your point about prosecuting the crooks, I couldn't agree more and on a global basis.

About Me

I was educated as a chemical engineer but spent almost my entire career in finance, particularly in money, FX and bond markets. The name stands for Hell-as-IOUs and the picture points to Quixotic endeavors.